Marital Prenups? A Look at CEO Severance Agreements
49 Pages Posted: 15 Mar 2012
There are 3 versions of this paper
Marital Prenups? A Look at CEO Severance Agreements
Marital Prenups? A Look at CEO Severance Agreements
Marital Prenups? A Look at CEO Severance Agreements
Date Written: March 13, 2012
Abstract
Some theoretical literature on firm-specific human capital investment suggests that severance contracts generate strong incentives for CEOs to ensure firm profitability, while the agency problem theory argues severance agreements are a less effective executive compensation measure. Using a unique sample of S&P 500 CEO severance agreements between 1993 and 2007, I examine whether and how the existence and structure of severance agreements influence subsequent firm performance, CEO investment behavior, as well as CEO turnover likelihood. I show that while firms with severance agreements tend to perform worse than firms without severance agreements, the structure of severance agreements also makes a significant difference in performance. In particular, I find that firms with cash-only severance contracts under perform other firms that also include equity elements in the agreement. In addition, I find that severance agreements affect CEOs’ risk-taking behavior in that they encourage CEOs to over invest in projects. The findings are robust to controls for possible endogeneity. Consistent with these findings I show in event study analysis that shareholders react negatively when firms award CEOs severance contracts and positively when firms cease to do so. Moreover, executives with severance contracts are more likely to be forced out of their firms. Results indicate that severance agreements, rather than promoting incentive alignment between CEOs and shareholders, actually exacerbate agency problems which lead to over-investment and poor subsequent firm performance.
Keywords: Executive compensation, Severance, Managerial incentives, Firm performance
JEL Classification: G34, J33, J41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
On the Importance of Golden Parachutes
By Eliezer M. Fich, Anh L. Tran, ...
-
Contractual Versus Actual Severance Pay Following CEO Departure
By Peggy Huang and Eitan Goldman
-
Marital Prenups? A Look at CEO Severance Agreements
By Peggy Huang
-
Marital Prenups? A Look at CEO Severance Agreements
By Peggy Huang
-
Contractual Versus Actual Severance Pay Following CEO Turnover
By Eitan Goldman and Peggy Huang
-
Contractual Versus Actual Severance Pay Following CEO Turnover
By Peggy Huang and Eitan Goldman
-
How do Ex-Ante Severance Pay Contracts Fit into Optimal Executive Incentive Schemes?
By P. Raghavendra Rau and Jin Xu
-
How Do Ex-Ante Severance Pay Contracts Fit into Optimal Executive Incentive Schemes?
By P. Raghavendra Rau and Jin Xu
-
How Do Ex-Ante Severance Pay Contracts Fit into Optimal Executive Incentive Schemes?
By P. Raghavendra Rau and Jin Xu
-
Golden Parachutes and the Wealth of Shareholders
By Lucian A. Bebchuk, Alma Cohen, ...